Rate cuts can only take you so far

By Stephanie Flanders Economics editor, BBC News

It was almost an anti-climax. We had all this doom and gloom from the housing market and the International Monetary Fund - and the response from the Bank of England was a measly quarter-point cut in rates.

The Bank last cut rates in February

Some will say the members of the Bank's monetary policy committee are hiding their heads in the sand. But their job is not to read headlines - or make them.

Their job is to look through the furore of the past few weeks and ask if anything has fundamentally changed.

Overall, their answer was no. They just thought the economy needed a little more help.

For sure, the housing market is slowing - quite sharply, perhaps. But that is more or less what the MPC expected when they last met.

And inflation is still a worry - especially at a time when the price of Brent crude has just jumped to more than $108 a barrel.

Also, the property market isn't the whole economy, even if some media coverage gives the impression it is.

So far, there is not much evidence of a sharp slowdown elsewhere.

Manufacturing figures out this week showed output growing at an annual rate of nearly 2% - the highest since the end of 2006.

There may be bad things in store for the future, but there is little sign of it yet in the data.

Fresh capital

Of course, the Bank of England isn't blind to the problems in the mortgage market. Most people with existing variable or tracker rate mortgages look set to enjoy the benefits of this cut.

Their rates have fallen almost in line with official interest rates since September. Eight of the leading lenders have already said they will pass on the quarter-point reduction in full.

But if you're looking for a new mortgage, things are not looking good - especially if you don't have much in the way of a deposit.

As of Wednesday, the average rate on a 95% two-year fixed rate mortgage had gone up by a third of a percentage point since September, despite the fall in rates.

Even with today's change, the signs are that the rates on those kinds of mortgages are going to stay high.

So should the Bank have cut further? Well, not necessarily. If the credit crunch means that banks are simply less willing - or able - to lend, rate cuts can only take you so far.

To be able to lend more, the banks either need to get fresh capital (for example, from those nice sovereign wealth funds) or offload the compromised assets they now have sitting on their books.

In the US, banks have been able to park some of those assets temporarily with the Federal Reserve. The Bank of England has never been very keen on the idea.

But as the crunch has deepened in the past few months, they have been gradually opening the door.

If mortgage rates continue to head northwards, you can bet that the Old Lady of Threadneedle Street will be pressed to do a lot more.

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